Canada’s New Digital Sales Tax

Jan 10, 2022

Written by: Brian Morcombe, Partner & Indirect Tax Practice Leader, BDO Canada – 2021

On July 1, 2021, new rules came into force that will significantly impact non-resident vendors and online platform operators. Specifically, the changes require certain non-resident vendors and operators of online platforms to register for, collect, and remit goods and services tax (GST)/harmonized sales tax (HST) on:

  • sales of digital products and services provided to Canadian customers;
  • goods supplied through fulfillment warehouses located in Canada and made by non-resident vendors directly through websites; and
  • supplies made via short-term accommodation platforms.

Here’s what you need to know about Canada’s new digital sales taxes.

Supplies of digital property and services

What are the new rules?

Non-resident vendors supplying digital property and services to consumers in Canada are required to register for and collect GST/HST on these taxable supplies to Canadian consumers. An example is Netflix which, prior to July 2021, may not have been viewed as carrying on business in Canada and was not required to register for GST/HST. Under the new rules, Netflix is required to register to collect tax from customers in Canada that are not registered for GST/HST, putting Netflix on equal footing with Canadian resident streaming service vendors already required to collect tax from customers.

A consumer includes persons not registered for GST/HST (persons registered for GST/HST are not considered consumers for the purposes of the new rules). Operators of third-party distribution platforms making these types of supplies are also required to register. A simplified registration and remittance framework is available to these registrants that are not otherwise carrying on business in Canada.

The new requirements apply to non-resident vendors and distribution platform operators whose revenue from taxable supplies of property and/or services exceed, or are expected to exceed, C$30,000 over a 12-month period.

Can ITCs be claimed?

A condition of the simplified framework is that non-resident vendors and distribution platform operators using the simplified registration framework are not able to claim input tax credits (ITCs) to recover any GST/HST paid on expenses they incur related to their Canadian sales.

Goods supplied through fulfillment warehouses and through websites

What are the new rules?

Distribution platform operators are required to register to collect and remit GST/HST under the general regime (as opposed to the simplified framework discussed above) on sales of goods located in warehouses in Canada if the sales are made through that platform by non-registered vendors. Non-resident vendors using Canadian fulfillment warehouses to sell in Canada without the use of a distribution platform are also required to register for and collect GST/HST under the general regime. Fulfillment businesses in Canada are required to notify the Canada Revenue Agency of their activities and maintain certain records related to non-resident clients.

Lastly, non-resident vendors that make sales to consumers in Canada using their own website are generally also required to register for GST/HST under the general regime. GST/HST registration and collection is required where qualifying supplies, including those made through distribution platforms by non-registered third-party vendors to purchasers in Canada that are not registered for the GST/HST, exceed or are expected to exceed C$30,000 in a 12-month period.

Can ITCs be claimed?

Vendors that are registered under the general regime, as opposed to the simplified framework, will generally be eligible to claim ITCs in respect of GST/HST incurred in the course of their commercial activities.

Short-term accommodation platforms

What are the new rules?

GST/HST applies to all supplies of short-term accommodation (generally a residential complex or unit supplied for periods of less than 30 days and for more than C$20/day) supplied in Canada through an accommodation platform, such as Airbnb. If the property owner is registered for GST/HST, the owner continues to be responsible for collecting and remitting the GST/HST from its guests. If the property owner is not registered for GST/HST, the accommodation platform operator must collect and remit the GST/HST on that property owner’s supplies of accommodation to consumers.

Can ITCs be claimed?

Non-resident accommodation platform operators that are not considered to be carrying on business in Canada and are making supplies to consumers (as opposed to GST/HST registered persons) use the simplified registration framework, resulting in no entitlement for ITCs. Accommodation platform operators that are resident in Canada are required to register under the general regime and are able to claim ITCs where all conditions are met.

What about provincial sales tax (PST)?

If all of this sounds familiar, it should. Quebec introduced digital sales tax provisions aimed at non-residents of Canada that are not registered for GST/HST and Quebec sales tax (QST), defined as foreign specified suppliers, as well as specified digital platform operators on Jan. 1, 2019, requiring them to become registered for QST. Beginning Sept. 1, 2019, this QST registration requirement was broadened to include residents and non-residents that are registered for GST/HST but not registered for QST (i.e., Canadian specified suppliers).

Impacted vendors are required to register for QST under the simplified framework where sales exceed C$30,000 to individual consumers in Quebec in the preceding 12 months and relate to intangibles (like software and digitized products) and services. Canadian specified suppliers are required to collect QST on goods as well as intangibles and services. Like the new GST/HST simplified framework, Quebec restricted input tax refunds on vendors using its simplified framework.

Effective Jan. 1, 2020, Saskatchewan introduced rules targeting non-residents making e-commerce sales to purchasers in the province. Online marketplace facilitators and online accommodation platforms are now required to register and collect PST on electronic distribution services that are delivered, streamed, or accessed through an electronic distribution platform (e.g., website, internet, portal, or gateway) and online accommodation services that are delivered or accessed through an online accommodation platform, respectively.

British Columbia expanded its PST registration requirements to include Canadian sellers of goods, along with Canadian and foreign sellers of software and telecommunication services. These new provisions come into force on April 1, 2021.

Lastly, Manitoba recently released legislation taxing certain digital sales of goods and services effective Dec. 1, 2021. The following vendors will be caught in the new rules and will be required to register for, collect and remit Manitoba retail sales tax (RST):

  • online marketplaces on the sale of taxable goods sold by third parties via their online platforms;
  • online accommodation platforms on the booking of taxable accommodations in Manitoba; and
  • audio and video streaming service providers on the sale of streaming services (by virtue of being included as telecommunication services).

Given the different approaches taken by the federal government and each of the provinces when taxing digital property and services, vendors and platform operators will need to gain a strong understanding of the requirements in each jurisdiction to prevent costly errors. If you need assistance navigating these rules, please contact your WVC advisor

Categories: Uncategorized


Funding For Import-Challenged Ohio Manufacturers – Up To $75,000

Jan 03, 2022

Have your sales been hit by import competition? If so, the federal Trade Adjustment Assistance for Firms (TAAF) program may be able to help. For Ohio manufacturers, the program is managed by the Great Lakes Trade Adjustment Assistance Center (GLTAAC) who helps qualified manufacturers identify, develop, staff, and pay for critical business improvement projects. GLTAAC clients have received up to $75,000 in matching funds.

While TAAF matching funds are extremely beneficial, GLTAAC clients also value the planning assistance received from their experienced team of manufacturing professionals. The guidance helps to clarify which projects can best support each client’s growth strategy while matching funds help clients fast-track those important efforts – regardless of the project’s size. Here are just a few case studies to demonstrate the value of GLTAAC and how leveraging funding can aid your organization:

  • Big impact from a quick and concentrated effort for an instrumentation manufacturer – An Ohio GLTAAC client had recently changed its name and required a rebrand with a new logo. After multiple conversations with key company stakeholders and a marketing consultant, a new logo was developed. The company’s website now features their re-designed logo and the GLTAAC client states, “This TAAF co-funded project was a simple, small – but strategic – marketing effort. Two weeks of intense work and results.”
  • TAAF matching funds saved both money and time for Ohio foundry – When their existing ERP system was being phased out, this GLTAAC client knew they would use TAAF matching funds for outside IT expertise to migrate to a new system. However, they also recognized their shortage of a key resource: time. They elected to utilize TAAF co-funding to hire a consultant to serve as the internal project manager for the entire ERP upgrade process. The consultants managed and ran all aspects of the upgrade, which enabled the project to be completd on schedule without disruption. Total cost for both consultants: $91,000 (TAAF paid 50%).

If import competition has hurt your sales, don’t put off learning more about TAAF and GLTAAC. Here’s how to get started.

STEP ONE – Contact GLTAAC Project Manager, Jani Hatchett at hatchett@umich.edu or 734.998.6227. Jani can quickly outline the TAAF program and help you determine whether your firm would qualify and provide the next steps.

STEP TWO – Don’t forget to follow us on LinkedIn and check out our website at www.gltaac.org.

Categories: Manufacturing & Distribution


Ohio’s Municipal Withholding Dilemma – Take 3

Dec 30, 2021

Hybrid work arrangements significantly impact municipal income tax withholding requirements and raise other municipal tax issues.

With the start of the new year just around the corner, the “pre-pandemic” law for Ohio municipal income tax withholding will soon return.

Applicable to periods beginning on or after 1/1/2022, if an employee works a hybrid schedule by spending some days working at home and other days working at the office, employers will once again be required to withhold municipal tax based on where the employee’s work is actually performed. For many employers, this may trigger withholding for employees’ home municipalities that the employer may never have been required to do before. Additionally troubling is the requirement for businesses to allocate such wages, and potentially apportion some gross receipts (sales) as well, to these home municipalities for purposes of the net profits (income) tax, subjecting the company to income tax reporting in each of their employees’ home municipalities.

As we recommended in our July blog, to ease the complexities of tracking actual work locations for Ohio municipal withholding requirements in 2022, employers could consider having employees sign formalized, hybrid work agreements. Such agreements provide consistency, structure, and ease of record keeping. In exchange for permitting hybrid work schedules, employers might consider requiring employees to report true-up differences between actual and forecasted work on their personal municipal income tax returns and to provide proof of payment (in case the employer is audited). Noting that the hybrid work agreement will be helpful but cannot cover all municipal activity, employers could also aim to develop ways within their internal system to most easily track multi-location work performed by employees throughout the year. Employers could consider contacting municipalities to gain pre-approval of estimated or hybrid withholding approaches or enter into withholding agreement(s) with the municipalities. Consultation with legal counsel related to any employment arrangements should also be considered due to the complexity of labor laws.

If we can assist you regarding your specific facts and circumstances and in making decisions about municipal income tax compliance or if you have any questions, please contact your William Vaughan Company advisor.

Categories: Tax Compliance


Employee Retention Tax Credit – Updates & Reminders

Nov 15, 2021

Don’t leave ERTC money on the table!

The Employee Retention Tax Credit (ERTC) is a provision established under the CARES Act which has been enhanced by additional legislation and could provide an immense amount of capital to employers. Unfortunately, statistics are showing the credit is being underutilized. The good news is with year-end planning on the horizon, now is the perfect time to leverage the ERTC.

What is the ERTC?
This is a refundable tax credit employers can claim against certain employment taxes, equal to a percentage of qualified wages and health insurance premiums paid after March 12, 2020, and before September 30, 2021.

For 2020, the credit is 50% of qualified payments, up to $10,000 per employee. Simply put, an eligible business has the potential to request refunds of up to $5,000 per employee for the year.

For 2021, the credit increases to 70% of qualified payments, up to $10,000 per employee per quarter. The credit was intended to run through December 31, 2021, but the passing of the recent Infrastructure Bill put an end to it after September 30. Nevertheless, the credit is still fair game for the first three quarters of 2021. With a maximum credit of $7,000 per employee, per quarter, a business eligible for all three quarters of 2021, could receive refunds of $21,000 per employee. Without question, the ERTC can provide much-needed dollars for eligible employers.

How do I know if my business is eligible?
For most businesses, eligibility is determined by meeting one of two tests; with a third test available for quarters 3 and 4 of 2021, which will be outlined later.

  • TEST #1 – A measure of decline in gross receipts. If an employer experiences a significant decline in gross receipts for any calendar quarter, as compared to the same calendar quarter in 2019, they will be eligible for the credit in that quarter. For 2020, this is defined as gross receipts that are less than 50% of gross receipts for the same quarter in 2019, and for 2021, this is gross receipts being less than 80% of gross receipts for the same quarter in 2019.
  • TEST #2 – A full or partial suspension of operations. If an employer was subject to any full or partial suspension of operations because of government orders related to COVID-19 they could be eligible. These orders could be Federal, State, county, and/or municipality. Even if your business was deemed essential and was not directly affected by such orders, there still could be avenues to be eligible for the credit.
  • TEST #3 – Under a third test, if a business can meet the definition of a recovery startup business, they can claim the credits for the 3rd and 4th quarters of 2021 only (not exceeding $50,000 per quarter). A recovery startup business is any employer that began a trade or business after February 15, 2020, and has average annual gross receipts of less than $1,000,000.

What are some important details to keep in mind?

  1. First, gross receipts are determined based on the method used for the employer’s tax return. Meaning, if your business uses the cash method for tax purposes, then gross receipts for Test #1 should be calculated using the cash method, even if your financial statements use the accrual method. This could be beneficial for businesses, especially during times when the pandemic was hitting the hardest and collections slowed.
  2. Another important item to keep in mind is that, for this credit, employers are considered either small or large. For 2020, a small employer is one that, based on 2019 counts, averaged 100 or fewer full-time employees. For 2021, this number increases to an average of 500 or fewer full-time employees, still based on 2019 counts. If a business is above these amounts, they are considered large. Small employer status is more advantageous because it allows qualified wages to include all wages paid. If a business is considered a large employer, qualified wages are limited to wages paid to an employee only for the time that employee was not providing services. For example, if your business is a large employer and operations were partially suspended, but all your employees continued working during that time, your business may not be able to claim any credits on the wages paid during that suspension period. For this purpose, a full-time employee is an employee that, in 2019, averaged at least 30 hours per week or 130 hours per month. As an example, an employer in 2019 who had 5 employees that worked 25 hours per week and 5 employees that worked 30 hours a week, would only be considered to have 5 full-time employees. Early on, a common misconception was that full-time employees were equal to full-time equivalents, which may have caused some businesses to think they were large employers, when in fact that may not be the case.
  3. Finally, there are several different paths a business could take to qualify for the ERTC based on a full or partial suspension of operations due to governmental orders. As previously mentioned, even if your business was not directly affected by the orders, there still could be ways to qualify for the credit. We encourage you not to overlook this test as it could be very beneficial to revisit.

What are my next steps?
With year-end planning season looming, your William Vaughan Company advisor will surely be discussing this topic with you in the coming weeks. If you are not currently a client, but this topic has piqued your interest and you would like us to look at how this credit might benefit your business, please do not hesitate to reach out to us. As mentioned, the credit has been generally underutilized, so we would love to help your business realize the greatest benefits it can.

Connect With Us.

Mike Hanf, CPA, CGMA

ERTC Lead

mike.hanf@wvco.com

Categories: Tax Planning


Timely Estate Planning Strategies: Part Three

Nov 01, 2021

Charitable Gift Planning Opportunities

In the third installment to our Timely Estate Planning Strategies Series, we outline how traditional income and estate planning may incorporate an individual’s desire to fulfill philanthropic goals. Giving can be done both while living (receiving current income tax deductions) and through one’s will at the time of death (garnering estate tax deductions). However, given the current ‘perfect storm’ we outlined in the first blog of the series, there is no better time to address your giving strategies.

The estate tax exclusion is currently $ 11.7 million per individual which means persons with an estate less than this will NOT benefit from charitable bequests in their wills. The emphasis for these individuals should be obtaining current income tax deductions while fulfilling their charitable intent. Individuals with taxable estates greater than $ 11.7 million can receive a double tax benefit by making lifetime charitable gifts. The donation is deductible for income tax purposes when the gift is made; the property along with any future appreciation is removed from the taxable estate.

Several opportunities to benefit from current charitable gifts are available. It is important to note, total itemized deductions including charitable deductions must exceed the standard deduction to receive a current income tax benefit. Some of your options include:

  1. Bunching contributions into one year to make sure you exceed the standard deduction.
  2. Contributing to Donor-Advised Funds (DAFs). A large contribution to the fund in year one provides the income tax deduction. After which, amounts can be paid from the fund to charities over a designated number of future years.
  3. Donating to Charitable Remainder Trusts. The remainder interest in a given property is donated to charity, obtaining a current income tax deduction, and retaining an annuity (income) interest in the property during the donor’s lifetime. Or the reverse of this,
  4. Giving to Charitable Lead Trusts. This provides a charity an annual distribution while the remainder interest passes to a Trust beneficiary in the future.
  5. Making Qualified Charitable Distributions (QCDs). Taxpayers over the age of 70 1/2 contribute directly from their IRA to a specified charity. The distribution is not taxable and no charitable deduction is taken. Structured properly, this can convert required minimum distributions into nontaxable withdrawals from the retirement account.

Your WVC advisor would love to meet with you and your estate planning team to see how charitable transactions could help you meet your philanthropic goals in a tax-efficient manner.

Connect With Us.
wvco.com | 419.891.1040

Categories: Estate Planning